The Wall Street Journal-20080124-New York Seeks Bailout of Bond Insurers
Return to: The_Wall_Street_Journal-20080124
New York Seeks Bailout of Bond Insurers
New York state insurance regulators are trying to spur a Wall Street bailout of bond insurers Ambac Financial Group Inc. and MBIA Inc., which have been shaken by mortgage-debt turmoil. Shares of the companies soared on hopes for a deal.
Bond insurers are at the center of the mortgage-debt storm because they have guaranteed some of the financial instruments now going sour. The bond insurers' solvency has become one of Wall Street's biggest preoccupations.
Just the possibility of a bailout deal being reached was enough to cheer investors. Ambac's shares jumped 72% to $13.70, and MBIA's rose 33% to $16.61 as of 4 p.m. in New York Stock Exchange composite trading.
The companies' stocks have fallen in recent weeks as much as 85% from their 52-week highs, on concern that they might lose their coveted triple-A credit ratings. Last week, Fitch Ratings downgraded Ambac to double-A, while Moody's Investors Service recently placed Ambac and MBIA on watch for possible downgrades.
A banker who attended the bailout discussions, between investment banks and New York Insurance Superintendent Eric Dinallo, said they were "very preliminary."
Other joint Wall Street efforts to manage the credit crunch have fallen short. Last year, Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co., at the behest of the U.S. Treasury, tried and failed to set up a fund to rescue entities known as structured- investment vehicles. Some people involved in yesterday's meeting called it the "son of the super SIV," a reference to those plans.
So far, Ambac and MBIA have pursued their own capital-raising plans without the orchestration of New York regulators. As of late yesterday, Mr. Dinallo hadn't communicated any concrete bailout plan to the bond insurers, who didn't attend yesterday's meeting, according to people close to the matter.
Bond insurers guarantee the interest and principal on $2.4 trillion of bonds, much of it issued by municipalities. Pressure is building on Ambac, MBIA and other bond insurers to increase their capital. Higher defaults in the bonds they insure could put them on the hook for billions of dollars in claims.
Representatives of Citigroup, J.P. Morgan, Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. attended the two-hour meeting at Mr. Dinallo's office, according to several people who were there. About two dozen people attended, and no federal regulators were present, according to one person familiar with the matter.
Insurance department spokesman David Neustadt said Mr. Dinallo had met yesterday with the bond insurers'"counterparties and policyholders." Mr. Neustadt didn't discuss specifics.
It isn't clear how a Wall Street-led bailout would work and whether the investment banks, many of them trying to raise money themselves, would be eager to contribute.
While some banks still have the financial wherewithal to participate, "trying to get all the banks together to bail out" the bond insurers "may be like trying to herd a bunch of cats," David Havens, a senior analyst at UBS Securities, wrote in a research note.
---
Susanne Craig and Robin Sidel contributed to this article.
